Allegheny Energy, Inc. Q1 2008 Earnings Call Transcript

May. 1.08 | About: Allegheny Energy (AYE)

Allegheny Energy, Inc. (AYE) Q1 FY08 Earnings Call May 1, 2008 8:30 AM ET

Executives

Max Kuniansky - Executive Director, IR and Corporate Communications

Paul J. Evanson - Chairman, President and CEO

Philip L. Goulding - Sr. VP and CFO

Analysts

Daniel Eggers - Credit Suisse

Greg Gordon - Citigroup

Ashar Khan - SAC Capital

Brian Russo - Ladenburg Thalmann

Vic Khaitan - Deutsche Asset Management

Amit Thakar - Seymour Pierce

Reza Hatefi - Polygon Investment

Paul Patterson - Glenrock Associates

Daniele Seitz - Dalhman Rose

Clark Orsky - KDP Investment Advisors

Operator

Good morning. My name is Rachel, and I'll be your conference operator today. At this time, I would like to welcome everyone to the First Quarter 2008 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions].

I would not like to turn the call over to Max Kuniansky, Executive Director, Investor Relations and Corporate Communications. Please go ahead.

Max Kuniansky - Executive Director, Investor Relations and Corporate Communications

Good morning everyone and thanks for joining us If you have to leave the call before it's over you can listen to the taped replay, it's available until midnight on May the 8th and you can listen to it by telephone on our website or by podcast.

Some of our statements will be forward-looking. These statements involve risks and uncertainties and are based on currently available information. Actual results may differ significantly from the results in the outlook we discuss today. Please refer to our earnings news release and our SEC filings regarding factors that may cause actual results to differ from the forward-looking statements made on this call. Our presentation includes the non-GAAP financial measures. On our website you will find the reconciliations required under the SEC's regulation G.

After our prepared remarks we will take your questions. We ask that you to try to limit your question two each so we have time to get to as many of you as possible.

And now, let me introduce Paul Evanson, Chairman, President and Chief Executive Officer of Allegheny Energy.

Paul J. Evanson - Chairman, President and Chief Executive Officer

Good morning everyone and thanks for joining us. Earnings for the first quarter of 2008 were $0.80 per share up from $0.65 a year ago. Higher generation rates in Pennsylvania increased PJM market prices and lower taxes were the key drivers of our improved results. But, higher coal costs and lower generation output at unregulated plants partially offset these improvements. At our supercritical power plants, availability was 89% and the unplanned outage factor was 6.9%. Both are consistent with our goal of achieving top quartile performance this year.

So, we remained well positioned to deliver strong earnings growth for the reminder of the year and beyond.

And now, let's turn to our progress on some other 2008 priorities. Securing approval for our Trans-Allegheny Interstate Line or TrAIL is a top priority. Two weeks ago we reached a significant settlement in West Virginia. The staff of the Public Service Commission, the consumer advocate and our large industrial customers all signed on to an agreement which will among other things bring a 100 to 150 jobs to West Virginia, protect our West Virginia customers from project related costs for seven years, and fund conservation and all [ph] income customer programs, all the parties to the settlement agreed to support the need and the route for TrAIL going forward. There are still interveners who will publish the line but this is nonetheless an important step toward approval in West Virginia.

The commission has extended the decision deadline from 90 days to allow time for consideration of the agreement. So, we now anticipate a decision by August 2nd.

We've also concluded hearings on TrAIL in Pennsylvania and Virginia, and expect recommendations from the administrative low judge in Pennsylvania and the hearing examiner in Virginia sometime this summer, with final commission orders in both states by the fall.

On the central level we reached an agreement with all the intervening parties for a 12.7% rate of return on equity for TrAIL. We anticipate FERC will approve the settlement later in the year. The yearly launch, FERC also approved incentive rate treatment for our second major transmission project, the Potomac-Appalachian Transmission Highline or PATH, this is the joint venture with AET. The incentive treatment specifies a return on equity of 14.3%. Several parties to the proceeding have asked for reconsideration.

And we plan to file for a state approvals on PATH away [ph] in the fourth quarter of this year, and would anticipate commission decisions a year or so later.

Besides a major regulatory challenge in Virginia, namely recovery of purchase power costs.

Yesterday, we filed a request to recover $73 million or more of purchase power costs for the period from July 1st of this year through June 30th of next year. This is an important filing because it includes for the first time, the period in which capped rates and default service spend as a result of legislation passed last year in Virginia. The memorandum of understanding or MOU that we signed in 2000 froze our rates during the period of default service. We therefore believe that the MOU ends at the latest on January 1, 2009 the day that the new legislation is effective. We have urged the commission to act expeditiously on our filing because of the significant cash losses we are experiencing in Virginia.

In the meantime we continue to explore all of our options regulatory, legal or otherwise to extricate ourselves from this very serious financial challenge.

Now, moving to Pennsylvania, hearings took place in April in Allegheny Powers planned the energy procurement once generation rate caps expire at the end of 2010. The administrative law judge is expected to make a recommendation in mid May and the commission has set the end of July for a decision.

Under Pennsylvania legislative front, governor Rendell, and the general assembly continue to work toward a comprehensive energy package. It's just hard to predict when these discussions will lead to final legislation. It could happen in June as part of the budget process or it might continue over the rest of the year or even beyond.

Now environmental stewardship is another key priority. Our scrubber projects that had sealed in Fort Martin power plants continue to move forward on schedule and on budget for in-service in 2009. In addition, we continue to promote energy conservation and efficiency through our watt watches program.

Now into others matters. Lastly, Allegheny energy supply... our generation subsidiary was a successful bidder in a competitive auction to provide power to our customers in Nolan [ph], supply won two contracts for a total of 700,000 megawatt hours of residential load, the larger contract was for 29 months beginning January '09 at a price in the range of $80 to $85 per mega watt hour at the generator.

We also participated in PJM's capacity auction for the 2011, 2012 planning year. This will happen early in May and the results will be announced in mid-May. Before closing, I would like to welcome Curtis Davis as our new Chief Operating Officer for generation. Curtis joined us March 1st after a 33-year career at Duke Energy.

Curtis most recently served as Senior Vice President in charge of Duke's unregulated generation point. He is a proven and capable warrior experienced in power plant performance and cost control. He will be a strong addition to our senior management team here at Allegheny.

So, in summary, we've made progress on many of our initiatives and we remain on track to achieve our goals for 2008 and beyond.

Now, let me turn the call over to Phil.

Philip L. Goulding - Senior Vice President and Chief Financial Officer

Thank you Paul and good morning everyone. Yesterday we reported net income of $136 million for the first quarter of 2008 compared to $110 million a year ago. We earned $0.80 per share in the first quarter versus $0.65 in the same period last year. There were no adjustments to net income in either period.

Let me summarize the key factors that impacted the year-over-year change in earnings per share. The net effect of market prices, marketing contracts and hedging activities increased EPS by $0.08. Prices in our zone averaged $67 per megawatt hour, a 25% increase over first quarter 2007 prices. Higher coal prices at a supply hurt EPS by $0.07; our fully delivered coal price increased approximately 11% to $43 per ton.

Higher generation rates in Pennsylvania improved EPS by $0.06. Our Pennsylvania generation rates increased 8% on January 1st of 2008.

Lower plant output reduced earnings per share by $0.06. This decrease was principally due to lower unregulated generator availability. Super critical availability at our unregulated plants declined form 94% in the first quarter 2007 to 90% this quarter. Sub critical availability was also down over the period.

T&D revenues excluding the effects of the West Virginia rate case increased EPS by $0.04. This was primarily driven by transmission expansion revenues and the exploration of the Maryland Customer choice credit. Higher O&M expense reduced EPS by $0.03. Net interest expense excluding securitized interest which is recovered in rates added $0.02 per share. Benefits from favorable income tax settlements resulted in a $0.05 per share increase. Income tax law changes that lowered the tax rate in West Virginia added $0.04. All other factors increased earnings per share by $0.02. In total earnings per share increased by $0.15.

Now, I would like to discuss the first quarter year-over-year changes in each of the primary lines of the income statement. Beginning with the top line, revenues increased by $27 million. Let me summarize the key contributing factors. Market prices including marketing and hedging activities increased first quarter revenues by $25 million.

Capacity revenues accounted for $6 million of this increase. Higher Pennsylvania generation rates increased revenue by $17 million. T&D revenues excluding the effects of the West Virginia rate case increased $13 million primarily due to transmission expansion projects, the exploration of the Maryland customer choice credit in early 2007 and lower growth which was partially offset by milder weather. The net effect of low gross in weather resulted in a 1% increase in megawatt hour sales. Decreased generation output reduced revenues by $28 million. Moving from revenues to expenses, fuel expense was up by $80 million period to period.

Higher coal prices partially offset by reduced generation output contributed to this increase. Purchased power costs increased by $4 million in the first quarter of 2008, largely due to increases in Allegheny Power's third-party purchases of energy and associated services.

Deferred energy reduced operating expense by $9 million, primarily reflecting increases in West Virginia fuel and energy costs, which will be recovered subsequently through our energy clause. O&M was higher by $8 million, primarily due to higher storm restoration costs and an increase in generation special maintenance.

Let me talk a little more about our 2008 outage plans and anticipated special maintenance spending. Most of our remaining supercritical plant outages are scheduled for the second quarter of this year. As a result our special maintenance expense is expected to be significant in the second quarter, and then well below 2007 levels for the remainder of the year. Continuing with the income statement, taxes other than income taxes decreased by $4 million. The first quarter of 2008 benefited primarily from the resolution of prior-year tax issues. Net interest expense, excluding interest related to securitized debt was down $6 million.

All other pre-tax factors were up $2 million. The net result of all of these was a $13 million increase in pre-tax income. Our effective tax rate this quarter was 30% which compares to 39% for the same period a year ago. This lower tax rate is primarily the result of benefits from favorable income tax settlements and the tax law changes in West Virginia.

We expect our tax rate to be about 38% for the remaining three quarters, resulting in an effective tax rate for the year of about 36%. This concludes my discussion of the income statement. Moving on to cash flows.

Net cash flow from operations was $105 million in the first quarter of 2008, $49 million decrease compared to the first quarter 2007, largely due to changes in working capital in both quarters. EBITDA was actually $10.5 million higher year-over-year.

Capital expenditures were $240 million, including $146 million of spending on our scrubbers, and transmission expansion projects.

Free cash flow, including our payment to Merrill Lynch, but excluding capital expenditures for the Fort Martin scrubber, which are funded through securitization proceeds, was negative 139 million for the quarter. Cash flow after dividends was negative 164 million. We expect capital expenditures to be about $1.3 billion in 2008.

Our credit metrics continue to improve; debt excluding securitized debt was 3.1 times adjusted EBITDA, while EBITDA was 5.3 times adjusted interest expense.

Now let's turn to the outlook. Here again are the key factors that we expect to drive earnings growth for 2008 as compared to adjusted 2007 results. Remember this is not a complete model, but it is directionally correct and hopefully helpful. We have made some changes from what we presented in February. Let me update you on several items. Based on first quarter results and additional hedges in marketing contracts we have entered into since our last call. We have increased the market price driver by $10 million to $40 million for the year. We now have less than $1 million megawatt hours of un-hedged generation for the reminder of 2008.

We have reduced our estimate for SO2 allowance cost by $10 million based on the current price of allowances.

Stock coal prices however continued to rise sharply over the past 3 months. We now expect higher coal prices to adversely impact supply by about $70 million, a $20 million increase over our previous estimate. This increase is a result of closing our remaining open positions at current prices and incorporating potential impacts of supplier performance issues.

Some of these growth drivers do not occur pro rata over the rest of the year. As I mentioned earlier, most of our remaining super critical plant outages and associated special maintenance expenses will occur in the second quarter of this year.

We expect special maintenance expense to be considerably lower in the fourth quarter.

Because of the lower plant outages, we expect a significant portion of the availability improvements to occur in the fourth quarter.

Let me take a few moments to update you on our commodity exposure in 2009 and beyond. We have begun the process of securing some of our remaining open coal position and hedging our open generation position for 2009. We expect to have 80% to 90% of our 2009 coal needs contracted once this process is complete. But, due to the sensitive nature of active contract negotiations we will not be providing any information on contract pricing at this time.

As I mentioned on our last call, our primary commodity exposure in 2009 and 2010 is to dark spread which is the spread between coal and power prices. Based on current forward coal and power prices the dark spread is widened in 2009 and 2010 relative to forward prices last summer. In 2011 and beyond because of our long-term coal contracts, our primary commodity exposure is to gas prices. 2011 forward gas prices have risen by about $1.50 per MMBtu over the past 9 months and $1 per MMBtu since our last call.

So, although coal prices have increased over the last 9 months, gas prices and tower prices have increased even more. And, as a result based on current forward prices we remain well positioned for the coming years.

And with that, the operator will now accept questions.

Question And Answer

Operator

[Operator Instructions]. Your first question is from Dan Eggers.

Paul J. Evanson - Chairman, President and Chief Executive Officer

Hey, good morning.

Daniel Eggers - Credit Suisse

Paul, I was wondering if you could talk a little bit more about the Virginia filing and give us a more perspective on your view of legal position there. And, you know, if we get into a fight over when the end of default service obligation ends, what are you legal recourse options will be from that point?

Paul J. Evanson - Chairman, President and Chief Executive Officer

Right. Well we had two trialing last year, one on the argument that the MOU ended in July of '07, and then we had a second rate case on the excess megawatts over 367, the recovery on that, and we have legal appeals pending on the second one at this point in time. But we were directed by the commission last December to file them for the fiscal year beginning July of this year, going through June of next year. And that time period clearly covers the change in the... in the new law in Virginia, where regulation comes in fully January 1, '09, default service, I think very clearly ends, and our MOU is pretty specific that it lasts as long as there's default service.

So we believe we have a very strong case that that MOU ends. So that's why the request that we have is a $73 million, based on first six months being how the commission calculated the excess... over 367 megawatts to generate, which I said [ph] was $10 million on an annualized basis. So there's like 5 in the first half of the year or the last half of this year and then we would be getting full recovery, beginning January '09. So I think on the terms of the MOU itself, and the legislation, that's the main theory we're relying on. If you read through the requests and the filing, you'll find there are a lot of other theories in there that we think have noted also federal filed rate key parting [ph]. We even have unconstitutional taking.

We have something in there on financial distress, because when you are losing $100 million a year on the savings on a cash basis, and a lot on an earnings basis, clearly that calls for some regress, some solution by the commission. So we've asked a expeditious treatment. I think they will make a decision, I would hope, at least by the end of June. So that's kind of the legal side of it. Now we'll find, we're taking this really one step at a time.

Our legal case is still pending on the last, over 367. And we'll see where we go based on where the commission comes out. I mean in ideal, there still is the possibility we could reach a settlement outside the case, but we haven't been successful in the past in doing that. So I wouldn't give too much hope for that, although that clearly could be a way out also.

Daniel Eggers - Credit Suisse

You made reference to considering ways of easing the rate impact to customers with the transition, and I think there is some sort of phase-in securitization program or something else?

Paul J. Evanson - Chairman, President and Chief Executive Officer

Yeah, it's something we haven't really specified and we really thought we wanted to get the principal covered with the commission. The last time we asked for a request and we specifically had a phase in, so we thought, we'd just really focused on the main issue. I think the phase-in could in done in any number of ways. So long as we are getting adequate deferral and adequate carrying charges, with kind of a poster child actually for phase in and we believe that's the way to deal with it. So... and securitization maybe a factor in it. So we are trying to do everything we can to, one, mitigate the impact to our customers, both residential and industrial, but also to ensure that we get an adequate return in the state and our customers are assured of safe and reliable power.

Daniel Eggers - Credit Suisse

Okay. Hey, Phil, one last question just on the coal side. One, are you getting people and negotiating, sign multi-year deals for coal supply today and then to... you made a reference to some non-delivery on supply concerns just pushing up the coal costs for this year. Are you seeing that now or are you just being cautious about what could happen?

Philip L. Goulding - Senior Vice President and Chief Financial Officer

On your first question, there are suppliers who are willing to sign multi-year deals. There's still a pretty reasonable uncertainty as to what prices should be in 2010. So, our general behavior has been to focus on 2009 pricing and to spend less time negotiating 2010 and beyond pricing. So, that's the answer to question number 1. The second question is we are experiencing supplier performance issues, they are more of the nature that some of our suppliers particularly ones with the fixed price contracts are experiencing financial pressures largely due to mining regulatory oversight changes and higher fuel costs and when us [ph] long-term suppliers experience these kinds of difficulties we will generally work with them to help them succeed and to protect our long term interests. And we've done that a number of times successfully in the past.

We're currently working with a few of these suppliers to mitigate short-term issues. We also have one medium-sized supplier that's trying to take legal actions to terminate one of their contracts... or their primary contract with us, and in this kind of situation, we of course will pursue every option available to us to enforce contract performance and protect our interest.

So we've adjusted our estimate to try to incorporate some of these events, but these are real-time event. So they are just estimates.

Daniel Eggers - Credit Suisse

Got it. Thank you guys,

Paul J. Evanson - Chairman, President and Chief Executive Officer

Sure.

Max Kuniansky - Executive Director, Investor Relations and Corporate Communications

Thanks, Dan.

Operator

Your next question is from Greg Gordon.

Paul J. Evanson - Chairman, President and Chief Executive Officer

Greg, are you there?

Greg Gordon - Citigroup

Can you hear me

Max Kuniansky - Executive Director, Investor Relations and Corporate Communications

Yes, we can, Greg.

Paul J. Evanson - Chairman, President and Chief Executive Officer

Yes, we can now, yes.

Greg Gordon - Citigroup

Sorry. Couple of nuts and bolts. Tax rate, post '08 should we assume 38% on an annualized basis is about right?

Paul J. Evanson - Chairman, President and Chief Executive Officer

Yeah, Greg, that's the assumption that we would make, although we'll always work hard to do what we can to push that down, but that's a case by case situation. So, it's a good starting assumption.

Greg Gordon - Citigroup

Okay. And so on your pluses and minuses, when I look at the things that have changed, net-net were neutral, but you have that plus-minuses at the bottom for other, should I assume that the $0.09 you earned in the first quarter on tax rate would be sort of plus 9 in that other column?

Philip L. Goulding - Senior Vice President and Chief Financial Officer

Well. No, we break out... we break out on the plus and minuses, slightly break out the two --

Greg Gordon - Citigroup

I have got that. Sorry. Okay.

Philip L. Goulding - Senior Vice President and Chief Financial Officer

So there's a bunch of things in the $0.02 of other. One of them is that we did have... we did have lower depreciation and we did have lower taxes other than income in the current period.

Greg Gordon - Citigroup

So, I'm referring to page 28.

Philip L. Goulding - Senior Vice President and Chief Financial Officer

I'm sorry. Page 28 is pre-tax income. So, taxes --

Greg Gordon - Citigroup

Got you.

Philip L. Goulding - Senior Vice President and Chief Financial Officer

Taxes aren't included on it.

Greg Gordon - Citigroup

Okay. But all thing is being equal that sort of a one time benefit that you wouldn't have otherwise expected.

Philip L. Goulding - Senior Vice President and Chief Financial Officer

Right that that will show up in the year... that has... that is showing up in this year.

Greg Gordon - Citigroup

Great. The 700,000 megawatts, could you reiterate the busbar costs, I'm sorry, I missed that that you won in Maryland, that the busbar revenue, was it $80 a megawatt hour?

Paul J. Evanson - Chairman, President and Chief Executive Officer

We said it varied... it's in the range of between $80 to $85 a megawatt hour. We didn't want to get anything exact and specific really more for competitive reasons. So, that's the ballpark that is an $80 to $85.

Greg Gordon - Citigroup

Okay. The... can you give us some more color on what you are seeing in terms of spot CAP and spot AP in Illinois basin coal prices; my understanding of your position is on the short-run free scrubber operation you need to buy CAP, post scrubber operation you really have a tremendous amount of flexibility and what type of coal you use?

Paul J. Evanson - Chairman, President and Chief Executive Officer

No, we primarily buy pre-scrubber... of course we already have scrubbers on a good deal of our units. But, pre-scrubber we generally buy in northern AP coal, not CAP coal, we don't burn any CAP coal and PRB coal as you might recall. And then post-scrubber we'll buy Northern AP scrubber coal, Illinois basin coal and if need be PRB coal depending on where pricing goes over time.

Greg Gordon - Citigroup

Right. And you gave us a chart showing that dark spreads year-over-year basically are up but would it be fair to say that dark spreads if we looked at that from a... on a year-to-date basis are in fact down a bit through '09 and '10?

Philip L. Goulding - Senior Vice President and Chief Financial Officer

No. I don't think that would be fair. I think they... when I talked on the last call, anyway, we thought year-over-year or from the... before the coal-price increase period, if you go back to the summer of last year, the dark spreads were a little bit off. We now would see dark spreads a little bit up. So it's been, the last three months has been favorable in large part due to significant move in gas price. We have seen a $1 per MMBTU move in gas price for '09, well actually all the way up to '11. It's been more for '09, it's in the last three months.

Greg Gordon - Citigroup

Right. So, basically short-term we shouldn't be concerned that you needing to cover incremental coal needs is going to squeeze dark spread relative to where you have un-hedged power?

Philip L. Goulding - Senior Vice President and Chief Financial Officer

Well, shouldn't be concerned. I mean everything is a matter of timing we hedge, we do contracts. There's some level of uncertainty but structurally our business... our business is sound. We've have got as much increase in gas and power prices as we have got in coal prices. And at long term, I think the message is much stronger, the commodity changes and shifts we have seen in the last nine months are quite favorable for us. We had a significant move in the long-time gas price curve. And that's got a real big impact on us in 11 and beyond.

Greg Gordon - Citigroup

You've indicated you are hedged as much as 40% out to the mid, what, 2017?

Philip L. Goulding - Senior Vice President and Chief Financial Officer

Yes sir.

Greg Gordon - Citigroup

And that prices that are in the... under $50 a megawatt hour?

Philip L. Goulding - Senior Vice President and Chief Financial Officer

Yes, we do need our suppliers to perform to realize all that benefit, but we have a number of suppliers in those positions.

Greg Gordon - Citigroup

Final question, I was thinking some investors are a little bit concerned with availability factors in the first quarter. You know, this has been the... probably the only area of your business performance expectations where you've fallen a little bit short in the last year or so. What gives you confidence that over the balance of the year we're going to sort of make up what was on an EBITDA basis a little bit of a soft quarter and hit the numbers.

Philip L. Goulding - Senior Vice President and Chief Financial Officer

Well first thing and this has been a long-term process as you know Greg, and we continue to feel we are focused on the right things, spending the lot amount of money, but we continue to work on process improvement, culture change. We are delighted Curtis Davis join us as I mentioned earlier. So I think we are on the right track and I think the first quarter kept... demonstrated we are on track to hit our 89% availability. I mean we had a forced outage rate of 6.9% which is what we have to do this year throughout the balance of the year to be able to get to that top quartile.

Our availability was basically the same this quarter as it was in the first quarter last year which was a good quarter for us. I mean the table shows we are down at 1%, whatever, that's really as much rounding. We are actually down by 0.3%. So I think we're... we are on the right track. That doesn't mean we can't have problems during the year that could get us off course but I'd say on the fundamental item, I mean, for example tube leaks [ph], that's the major cause of outages, we've got them down by about a third in the last three years or so. So we've been focusing I think on the right items but things happen as they always can. But I am feeling pretty good where we are at. It's a continuing process and as time goes on I feel better and better, but I am feeling okay that we will hit those numbers this year.

Greg Gordon - Citigroup

Thank you gentlemen.

Operator

Your next question is from Ashar Khan.

Ashar Khan - SAC Capital

My questions have been answered. Thanks.

Paul J. Evanson - Chairman, President and Chief Executive Officer

Thank you Ashar.

Operator

Your next question comes from Brian Russo.

Brian Russo - Ladenburg Thalmann

Hello, can you hear me?

Paul J. Evanson - Chairman, President and Chief Executive Officer

Yes we are.

Philip L. Goulding - Senior Vice President and Chief Financial Officer

Yes.

Brian Russo - Ladenburg Thalmann

Okay. Could you just update on... us on total cost for PATH and TrAIL and just assuming the current regulatory timeline when you might start in current capital expenditures and then how... or earnings thoughts on financing of these projects?

Paul J. Evanson - Chairman, President and Chief Executive Officer

Well, I will take through the timeline of approvals and Phil could take it through the capital side. West Virginia originally was supposed to be decided probably tomorrow May 2nd, but as you probably have seen the delay about 3 months, because we entered into a settlement two weeks ago where the staff or the public service commission, the consumer advocate in the industrials which as I mentioned in the call earlier was... is very significant settlement. I think it demonstrates a lot of benefits to West Virginia. So, as a result of that so the commission now wants a hearing on that settlement. And they will get a decision by August 2nd now.

Pennsylvania and Virginia are likely to have decisions by the fall and we've been... basically all the public hearings and proceedings have been completed and we are just awaiting the various decisions. Phil, do you want to go through the cost side of it.

Philip L. Goulding - Senior Vice President and Chief Financial Officer

Sure. Our estimates in capital haven't changed, we still see $820 million estimate on TrAIL and a $1.2 billion estimate on PATH... for our portion of PATH. The... we also have about $100 million of near-term reliability projects related to transmission that PJM's requested. Many of those are complete now. In fact we have spent about $100 million in capital on TrAIL and those near-term projects to date, including last year.

The timing of the capital is... the estimates we provided in the 10-K and in previous discussions are still appropriate even though we have a three-month delay in the West Virginia decision. We had incorporated some assumed approval delays in the estimates we developed, and if the approval process completes on the timeline that Paul just described, we think our estimates are accurate.

And as far as financing, we have plans to launch a TrAIL financing at the business unit as soon as we have our regulatory approvals, shortly... probably shortly after the West Virginia approval, we'll go into the market to launch that financing. And we'll finance 50% of the capital needs at TrAIL. We don't need any other significant financings this year to accommodate our TrAIL or past spending.

Brian Russo - Ladenburg Thalmann

Are you at all concerned with your original cost estimates given the recent cost inflation we're seeing?

Paul J. Evanson - Chairman, President and Chief Executive Officer

No, we're really not. I think we have built in some of those escalations when we first did this, and we've been moving ahead with contracting on a number of the key materials on that and I think we still feel very good on our estimates on both sides.

Brian Russo - Ladenburg Thalmann

Okay, great. Thanks guys.

Paul J. Evanson - Chairman, President and Chief Executive Officer

Sure [ph] Brian.

Philip L. Goulding - Senior Vice President and Chief Financial Officer

Sure.

Operator

Your next question is from Ivana Erkovac [ph].

Unidentified Analyst

Hi. I have a question related to capacity auction. Even when you came down last PJM, but the generator, basically that's the first energy and reliant, are still allowed to bid into the action in May. Would you expect this could actually result in lower clearing prices than in the last auction?

Paul J. Evanson - Chairman, President and Chief Executive Officer

You are referring to the Duquesne?

Unidentified Analyst

Yes.

Paul J. Evanson - Chairman, President and Chief Executive Officer

Well, yes, the way it's been decided, that the load will be outside of PJM, but it's likely the generator serving that load, which is about 3,000 megawatts, will stay in. And that certainly is going to be a downward pressure on the auction, yes. But there are other factors around that may balance that and may not, but that in and of itself is clearly going to be a downward pressure on the auction price.

Unidentified Analyst

Okay, thank you. And another quick question. I see that your total generation is down for the quarter, and also the usage. Is this just due to the weather? Or you would think, it's some kind of impact or economic slowdown?

Philip L. Goulding - Senior Vice President and Chief Financial Officer

Well, it's a couple of questions embedded in that. Let me take each of them. Our coal output is down for the quarter. The most meaningful reason for that is in terms of dollars, is that we had a change in availability at our unregulated generation fleet. It came down from a very impressive 94% in the first quarter of '07 to 90% in the first quarter of '08. So in terms of the economic impact, that's the... that's the main driver. We had availability variance at our sub-critical coal plants also that contributed some to the economic or earnings impact.

As far as total output, we had a... even more pronounced output change quarter-over-quarter than availability change quarter-over-quarter and we think that's largely due to the fact that when coal prices moved up quickly in the year, we quickly changed our dispatch cost of our coal units and that's how we do it to represent what we thought our true replacement cost was.

It looks to us like perhaps some of the other generators in our region were sticking to contract prices for the first few months and a sense may [ph] have... had their output increase where our output decreased but that's in no way an economic to us and in fact that could be a small economic benefit to us and it would show up in our price variance for the quarter.

As far as, are we seeing the sign of changing economic times in our service territory that wouldn't affect generation as much... we are not actually seeing low growth decline; we are seeing low growth increase. We've got about a 1% increase in load for the quarter versus the same period a year ago and that's... that's basically the net of natural load growth in some unfavorable change in temperature.

Paul J. Evanson - Chairman, President and Chief Executive Officer

And we've been tracking pretty closely at the delivery business, the impact on... of the economy on customers and going through the first quarter the number of customer delinquencies is about the same as it was last year. We had about 185,000 customers with pass-through... 30-day past-through accounts which is exactly what it was the year before.

We probably are expecting to see that increase of debt but not really dramatically over the balance of the year. So I don't think that's going to have a major impact on our... on the delivery side either.

Unidentified Analyst

Okay thank you.

Paul J. Evanson - Chairman, President and Chief Executive Officer

Thank you.

Operator

Our next question comes from Vic Khaitan.

Vic Khaitan - Deutsche Asset Management

Hello, hi.

Paul J. Evanson - Chairman, President and Chief Executive Officer

Yeah, Vic, good morning.

Philip L. Goulding - Senior Vice President and Chief Financial Officer

Good morning Vic.

Vic Khaitan - Deutsche Asset Management

Good morning. Two questions, first on Pennsylvania, what does... Paul what do you think will happen with this delay in the Pennsylvania legislation and in the meantime while you are going through the regulatory process to get approval of the post 2010 plans, is that going to be phased in plan or is that going to be just a market based trade?

Paul J. Evanson - Chairman, President and Chief Executive Officer

Yes, on first on legislation, I mean, this has been going on I guess since last June and I mean I think that's some... there are a lot of different proposals being considered that... I think it was 5 bills have already been introduced in selling committee and it gets a little complicated because you know you have the democratic governor, the house is pretty well balanced but slightly democratic and the channel is strongly republican and there is an auction year. So, we are hoping that this may get resolved because nobody like the uncertainty. But it may get resolved by June by the budget process. I'm frankly thinking it likely will drag on through the balance of the year, and may not even get resolved at all this year.

I think we are close enough to party... they are relatively close enough to... that they could be and probably should be a resolution but, you know, we will see. On our side we are working with our power [ph] ends, the ends of 2010 because we are one year later than PPL that has... that will be coming out a year ahead of us. But we filed our plan with PUC. We had our hearing last month in front of the ALJ. We expect a recommendation from the ALJ in mid-May with a PUC decision by July and have thought of... with that launching a various procurement process beginning October, and I think where our plan as presented had seven tranches and 52 blocks over a period of time for the next... through October of '10 being the last one where it would go out. And I'm hopeful that that is going to proceed. I mean, the PPL one has proceeded, so I think this is a sensible way to balance some and over time the purchase of power for customers and really reduce the impact of them over that period. And we'll see over time where that comes out in terms of percentage increase. Our rates are really low today and have been frozen at a low rate largely because we didn't have any... we didn't have scrubbers on two of our plants, et cetera, so we have been locked in at a low rate, so we ought... we would be facing, despite the polar agreement extension that had some nice increases and despite that we would be facing probably a good-size increase in January '11.

And as I said earlier, as I've been saying for years, we believe in transitions and rate plans, and if it comes in with a high percentage, with obviously being there, talking to the Commission about... early about some kind of phase-in process and proposal. Now the phase-in may get be resolved in the legislation. That's a possibility. And one of them... one or two of those bills introduced do have phase-ins over a three-year period with recoveries. So if it's not resolved in the legislation, then likely we'll be in front of the PUC, and we'll try to reach a settlement with them on that, Vic.

Vic Khaitan - Deutsche Asset Management

Okay. Thanks. And one more question for Phil. When you talked about the dark spread, and essentially your long gas, short coal, so what... when do you see opportunity to lock in some of those nice spreads for you for 2010, 11 or beyond?

Philip L. Goulding - Senior Vice President and Chief Financial Officer

Well, we're looking at that, Vic. I think that really '11 is where the opportunity begins in a meaningful way. There are some, some '09 and '10 opportunities related to gas that we are looking at also, some impacts of gas on our portfolio. But 11 is the big topic. We're watching both gas and the PJM power prices. We're not necessarily that comfortable that PJM power prices, really '09, '10, or '11 are fully reflecting the fundamentals that are going on with gas and coal and emission allowances. So we're reluctant, particularly off-peak to be locking anything in financially in those markets. We're not sure they are accurately priced at this point. So we would probably be looking more at ways of locking in the margin by working on gas-related hedges in '11 and beyond, but it's still something we're exploring. It's unlikely we'd be able to get hedge accounting for it, but that doesn't stop us from thinking about it. And, we'll watch it over the... we'll be watching it over the coming months and thinking through whether we should some of that.

Vic Khaitan - Deutsche Asset Management

Yes, thanks.

Philip L. Goulding - Senior Vice President and Chief Financial Officer

Sure.

Operator

Your next question is from Amit Thakar.

Amit Thakar - Seymour Pierce

Good morning.

Philip L. Goulding - Senior Vice President and Chief Financial Officer

Good morning.

Paul J. Evanson - Chairman, President and Chief Executive Officer

Good morning.

Amit Thakar - Seymour Pierce

Phil, I actually had a follow-up question regarding the... I guess the volume reduction from the supercritical and all-coal plants you discussed a little bit earlier?

Philip L. Goulding - Senior Vice President and Chief Financial Officer

Sure.

Amit Thakar - Seymour Pierce

It looks like it was down, I guess, 4% year-on-year, and you kind of... you mentioned that some of that was related to how you were dispatching the plants?

Paul J. Evanson - Chairman, President and Chief Executive Officer

Yes.

Amit Thakar - Seymour Pierce

And that some folks were looking at contract pricing orders, you guys were kind of looking at what's happening in the coal markets?

Philip L. Goulding - Senior Vice President and Chief Financial Officer

That's our guess.

Amit Thakar - Seymour Pierce

And so was that... I mean if you guys are fairly highly hedged in 08 I guess was that... were some of the non-performance issues came into play?

Philip L. Goulding - Senior Vice President and Chief Financial Officer

No, no. We always look at replacement cost based on when we think we'd have to replace it when we bid our plants in. So even if we had you know strong contracts in 08 we'd be looking at what we thought our 09 replacement costs were and bidding that in. We don't want to actually sell coal through our generation below its true value in the marketplace.

Amit Thakar - Seymour Pierce

Understood. Thank you. That's very helpful.

Philip L. Goulding - Senior Vice President and Chief Financial Officer

And I think everyone... most market participants get that, I just think it's possible that when we had such a rapid change that some got to it later than others in terms of changing how they bid their plants in. I suspect everyone to pretty similar places now.

Amit Thakar - Seymour Pierce

I see. And then... and so... and then despite, I guess, you said that the dark spread was fairly strong in Q1 and that wasn't enough to overcome that, the replacement cost on the call.

Philip L. Goulding - Senior Vice President and Chief Financial Officer

Right.

Amit Thakar - Seymour Pierce

Got you. Thank you very much guys.

Paul J. Evanson - Chairman, President and Chief Executive Officer

Okay.

Operator

Your next question is from Reza Hatefi.

Paul J. Evanson - Chairman, President and Chief Executive Officer

Reza?

Reza Hatefi - Polygon Investment

Yes, filing from yesterday.

Paul J. Evanson - Chairman, President and Chief Executive Officer

Reza, we missed what you said until just a second ago.

Reza Hatefi - Polygon Investment

Yes, I am sorry, the Virginia filing from yesterday, when is the decision due on that?

Paul J. Evanson - Chairman, President and Chief Executive Officer

There's not a formal time requirement on Virginia but since we are talking about getting... putting this into rates, July 1st we'd expect a decision and certainly by the end of June.

Reza Hatefi - Polygon Investment

Okay. And the Maryland reprising, I think you mentioned $80 to $85?

Paul J. Evanson - Chairman, President and Chief Executive Officer

Right.

Reza Hatefi - Polygon Investment

Can you remind us again what that compares to in the old price?

Philip L. Goulding - Senior Vice President and Chief Financial Officer

$37 is the current power price for that.

Reza Hatefi - Polygon Investment

$37, okay, great. Thank you very much.

Paul J. Evanson - Chairman, President and Chief Executive Officer

Next question please.

Operator

Your next question is from the Ryan Mooney [ph].

Unidentified Analyst

Good morning Phil, good morning Paul.

Paul J. Evanson - Chairman, President and Chief Executive Officer

Good morning.

Philip L. Goulding - Senior Vice President and Chief Financial Officer

We are fine.

Unidentified Analyst

How are you doing? I wanted to follow up with some of Greg's questions on the coal suppliers you said you were discussing. And I guess the first question is can you quantify how many tons might be impacted from these issues that you are seeing?

Philip L. Goulding - Senior Vice President and Chief Financial Officer

Well, the only issues we are seeing that we would think would affect our actual delivery of coal with the one supplier that's trying to take more aggressive legal means to resolve their financial issues. And frankly, it's very uncommon to encounter this. It's normally the suppliers' work to honor their contract, but talk about difficulties and we understand it. So the one... the one more aggressive supplier... contractually, I think, we are expecting 500,000 to 750,000 tons this year and there are about 1 million tons a year going forward. But that situation is far from resolved, it's just an early phase situation. we have ever intention of trying to resolve it satisfactorily either through constructive discussion or legal action.

Paul J. Evanson - Chairman, President and Chief Executive Officer

Which kind is the downside of having good contracts when your contractor is much below where some of the current prices are, people look at their contracts, coal suppliers and sometimes you see... I have seen in the past with other utilities when the prices they are paying all of a sudden become much greater than what the current coal markets are. Pretty soon attorneys [ph] start finding questions in contracts. So, this is... some of this is to be expected I think.

Unidentified Analyst

Are these more fixed price contracts? And then --

Paul J. Evanson - Chairman, President and Chief Executive Officer

Yes.

Unidentified Analyst

...follow-up question would be, can you talk about your legal recourse that you might have with collateral or otherwise --

Paul J. Evanson - Chairman, President and Chief Executive Officer

These are fixed price contracts but we are not going to talk any further about the specific situation. It's not prudent to talk about these kind of situations when they are active.

Unidentified Analyst

Okay thank you very much.

Operator

Your next question is from Emily Christy [ph].

Unidentified Analyst

Good morning.

Paul J. Evanson - Chairman, President and Chief Executive Officer

Good morning.

Philip L. Goulding - Senior Vice President and Chief Financial Officer

Good morning.

Unidentified Analyst

With respect to the Virginia business, in addition to regulatory and legal proceedings are you exploring any strategic alternatives at this time?

Philip L. Goulding - Senior Vice President and Chief Financial Officer

Well I have said for a long time losing $100 million a year is just totally unacceptable to us and we can sustain it. So we are looking at anything and everything that's really nothing that's off the table to resolve this issue. But we are going kind of one step at a time in securing this satisfactory conclusion on our rate filing is the first step and a very, very important one to anything that follows that.

Unidentified Analyst

Okay. And is there any timeline for this... for the appeal currently pending before the Supreme Court?

Philip L. Goulding - Senior Vice President and Chief Financial Officer

I think the arguments are scheduled for this summer and we'd expect the decision in the fall. So that's on the excess of a 367, that's where our position was. We are entitled to about $40 million on an annualized basis based on the normal capacity for that excess and the commission came out with a 9.7 annualized on the amazing concept that the plants could regularly operate 365 days a year, 24 hours a day.

Unidentified Analyst

Right, okay. Thank you very much.

Philip L. Goulding - Senior Vice President and Chief Financial Officer

Yes.

Operator

So our next question is from Paul Patterson.

Paul Patterson - Glenrock Associates

Good morning, can you hear me?

Philip L. Goulding - Senior Vice President and Chief Financial Officer

Yes we can, Paul.

Paul Patterson - Glenrock Associates

Just on the operating cash flow, and I think it's 154 last year, it was 105 this year. I noticed that 9 million from the crude energy and a couple of million for depreciation. Could you go through a... just to feel the other factors that are leading to that decrease?

Paul J. Evanson - Chairman, President and Chief Executive Officer

Yeah, they are kind of unusual. The biggest one is that there is a cash flow benefit in the first quarter of '07 relating to the fact that we knew we were going to implementing a major new systems, SAP, and we actually did something that is not always the favored action of a CFO. We paid early a number of our vendors at the end of '06 to prepare for that implementation to buy ourselves some leniency as the system had troubles in the first quarter.

And so, bad effect of cash flows in the first... fourth quarter of '06, and that was a benefit in the first quarter of '07 and so the comparison to '07 looks less favorable from 08. We also had some fluctuations around our PJM payables and receivables in '08 that negatively impact the cash flow and those will happen from time to time. But I think at the core of it all just to go back to EBITDA and our EBITDA was up 10.5 million, there's nothing broken in the business or it's just that the unusual fluctuations of working capital in two different quarters.

Paul Patterson - Glenrock Associates

Okay. And then the deferred energy not the upside [ph], the depreciation, could you just remind me why that was down, what's actually leading to the still lower depreciation?

Paul J. Evanson - Chairman, President and Chief Executive Officer

Yeah, it related to the West Virginia rate case where part of that overall case we changed the depreciable lives of the regulated generation asset.

Paul Patterson - Glenrock Associates

That's purely on the regulated side?

Paul J. Evanson - Chairman, President and Chief Executive Officer

Yes, right.

Paul Patterson - Glenrock Associates

And then just finally on the balance sheet, the deliverable liabilities seem to take a significant jump --?

Paul J. Evanson - Chairman, President and Chief Executive Officer

Yeah, that's our hedges; our hedges are... with the price move we've seen in the last three months, or really last six months, our 2008 and 2009 financial hedges are well under water.

Paul Patterson - Glenrock Associates

Basically.

Paul J. Evanson - Chairman, President and Chief Executive Officer

But that will happen from time to time. We still like prices going up.

Paul Patterson - Glenrock Associates

Right, Okay. Great. Thanks. All of my other questions were answered. Thank you.

Paul J. Evanson - Chairman, President and Chief Executive Officer

Sure.

Philip L. Goulding - Senior Vice President and Chief Financial Officer

Thank you Paul.

Operator

[Operator Instructions]. Your next question is from Daniele Seitz.

Daniele Seitz - Dalhman Rose

Hello. I just had a quick question on the return on the TrAIL. When does it become significant, when you have actually done the financing or is it proportionate to the construction expenditures?

Philip L. Goulding - Senior Vice President and Chief Financial Officer

It starts immediately. It's... the... our TrAIL returns are hitting our results as we speak.

Daniele Seitz - Dalhman Rose

Okay. And so it follows, basically, your capital expenditures?

Philip L. Goulding - Senior Vice President and Chief Financial Officer

Yes, it does. In a formulaic manner.

Daniele Seitz - Dalhman Rose

Great, thanks a lot.

Philip L. Goulding - Senior Vice President and Chief Financial Officer

Sure.

Paul J. Evanson - Chairman, President and Chief Executive Officer

Sure [ph].

Operator

Your next question comes from Clark Orsky.

Clark Orsky - KDP Investment Advisors

I got on a little late, so this may have been addressed. But in your press release yesterday, you talked about the severe and worsening cash flow problem at Potomac. Just any update you can give us on kind of where Potomac stands?

Paul J. Evanson - Chairman, President and Chief Executive Officer

Well, we've covered that a bit. Certainly in the filing we have emphasized that Virginia side, because it is a Virginia filing, and we have 100,000 customers there. We should be making about $10 million a year, and we are losing significantly in Virginia. I mean the net cost of purchase power relative to our rates is probably $120 million now on an annualized basis going forward. So that's the Virginia side.

Potomac-Edison, of course is a Maryland... in addition to the Virginia assets is our Maryland assets and part of our West Virginia assets, and last year for that whole combined operation, we made about $12 million, and this year we're kind of projecting we could lose, if we got no relief, maybe $25 million.

Clark Orsky - KDP Investment Advisors

Okay. And is supply building up a receivable vis-à-vis the collections from Virginia?

Paul J. Evanson - Chairman, President and Chief Executive Officer

No. Supply had a contract to provide power to our delivery business to Potomac-Edison that expired in July of '07, and since then to meet its needs, Potomac-Edison has gone out on competitive bids, and on those bids supply has generally won those bids.

Clark Orsky - KDP Investment Advisors

Okay, thanks.

Operator

You have a follow-up question from Greg Gordon.

Greg Gordon - Citigroup

Yes, a question of clarification on the Maryland auction. What's the... the 700,000 megawatts of load you won... that's on the $3.5 million total load you used to serve. Is that right?

Paul J. Evanson - Chairman, President and Chief Executive Officer

Yes.

Philip L. Goulding - Senior Vice President and Chief Financial Officer

Yes.

Greg Gordon - Citigroup

And that's for what term?

Philip L. Goulding - Senior Vice President and Chief Financial Officer

Most of those megawatt hours are from the term January 1, 2009 through May 31, 2011. We also won a block of just five months from January 1st to May 31st 2009.

Greg Gordon - Citigroup

Okay. Great. And then the alternative that power would have presumptively just been sold into the wholesale market?

Paul J. Evanson - Chairman, President and Chief Executive Officer

Correct.

Greg Gordon - Citigroup

Thank you.

Philip L. Goulding - Senior Vice President and Chief Financial Officer

Okay. Thanks, Gregg.

Operator

At this time we have no further questions.

Paul J. Evanson - Chairman, President and Chief Executive Officer

Okay. Well I thank everyone for joining us, and look forward to our next sessions with you. Thank you.

Operator

This concludes today's conference call. You may now disconnect.

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